This Article delves into the aspect of crypto-taxation and attempts to answer the question as to under which head should any income derived from cryptocurrency whether directly or indirectly be dealt with for the purposes of taxation. Now lets under stand how the Income tax Act of 1961 defines and treats cryptocurrencies.
Cryptocurrency is classified as a 'Virtual Digital Asset' (VDA) under Section 2(47A) of the Income Tax Act, 1961. Notably, it does not fall within the ambit of Section 2(14), which defines "capital asset." Section 115BBH of the Income Tax Act addresses the taxation of income from virtual digital assets. Clause (3) of this section stipulates that the term "transfer," as defined in clause (47) of Section 2, applies to any VDA, irrespective of whether it qualifies as a capital asset.Consequently, the transfer of VDAs is governed by the provisions of Section 2(47), regardless of their status as capital assets.
A new clause, Section 2(47)(d), has been inserted to define a "crypto-asset" as a digital representation of value that relies on a cryptographically secured distributed ledger or similar technology to validate and secure transactions— whether or not such an asset is encompassed by sub-clauses (a), (b), or (c). This provision, however, takes effect only from April 1, 2026.
Under Section 56(2)(x) of the Income Tax Act, income is deemed taxable in the hands of the recipient if they receive (i) any sum of money, (ii) immovable property, or (iii) any other property (excluding immovable property) under circumstances where:
- it is received without consideration, and the fair market value (FMV) exceeds INR 50,000; or
- it is received for a consideration that is less than the aggregate FMV by an amount exceeding INR 50,000.
This section treats VDAs as "property" and, by extension, as capital assets. Accordingly, gifts of cryptocurrency exceeding INR 50,000 in aggregate value are taxable as 'Income from Other Sources' at the applicable slab rates.
The classification of income as 'Profits and Gains of Business or Profession' (PGBP) hinges on whether the VDA is held as stock-in-trade. Section 2(13) of the Income Tax Act defines "business" to include any trade, commerce, manufacture, or adventure in the nature of trade. Continuous activities or isolated adventures involving cryptocurrency qualify under this definition, rendering such profits taxable as PGBP. Even if realized in kind rather than fiat currency, the FMV of the cryptocurrency is deemed the taxable income. Individuals engaged in cryptocurrency trading or mining fall within this purview. Moreover, business deductions, including those in the form of cryptocurrency, are permissible under relevant provisions.
VDAs may be taxed under three distinct heads, corresponding to specific Income Tax Return (ITR) forms: Capital Gains (ITR-2), PGBP (ITR-3), or Income from Other Sources (ITR-5).
In Raunaq Prakash Jain v. Income Tax Officer1, the Income Tax Appellate Tribunal (ITAT) Jodhpur ruled that the sale of cryptocurrency constitutes a transfer of a capital asset, taxable under the head of Capital Gains. The tribunal observed:
"Plain natural definition of 'property' as is given in the Act: property of any kind held by an assessee, whether or not connected with his business or profession; which a person actually owns something of value. Though cryptocurrency/virtual digital asset is also not a currency but it is not an asset within the meaning of section 2(14) of the Act. The amendment made in the Finance Act, 2022 has defined Virtual Digital Asset (VDA) u/s 2(47A) of the Act wherein the name given is of virtual digital assets. Thus, considering the plain vanilla meaning before the amendment as is to be understood at the time of purchase & sale of cryptocurrency (bitcoins) which is a right of the assessee attached to the investment made. If we consider the definition of capital asset as given in section 2(14) of the Act which says that 'Property of any kind held by an assessee, whether or not connected with his business or profession.' Explanation 1 to this section reads that 'property' includes and shall be deemed to have always included any right in or in relation to an Indian company, including right of management or control or any other right whatsoever. Thus all rights are property and thereby the right of the assessee in Bitcoin though a virtual asset is a capital asset. Therefore, the AO is incorrect in holding that to qualify as capital asset one should actually own something as property in as much as even if a person has a right or claim on a property it is also a capital asset u/s 2(14) of the Act. Further section 2(47) of the Act defines transfer in relation to a capital asset to include sale, exchange or relinquishment or extinguishment of any right therein."
The Supreme Court in M.K. Bros. (P) Ltd. v. Commissioner of Income Tax, Kanpur2 emphasized that the nature of a transaction turns on the underlying intention. An asset acquired for retention as an investment yields capital
1 (MANU/IO/0128/2024)
2 (1973) 3 SCC 30
gains upon sale, taxable under Capital Gains rather than PGBP. However, if the same asset is later converted to stock-in-trade and dealt with in the ordinary course of business, the resulting profit is assessable as business income. The original intent at acquisition is immaterial once the character shifts; intention remains the pivotal factor in distinguishing capital assets from stock-in-trade.
Similarly, in CIT Cochin v. Mrs. Grace Collis3, the Supreme Court clarified:
"Section 2(47) defines 'transfer', in relation to a capital asset, to include the sale, exchange or relinquishment of the asset or the extinguishment of any rights therein or the compulsory acquisition thereof under any law. Section 45 states that any profits or gains arising from the transfer of a capital asset effected in the previous year shall be chargeable to income tax under the head 'Capital gains' and shall be deemed to be the income of the previous year in which the transfer took place. Section 47 states which transactions are not to be regarded as transfers. Nothing contained in Section 45 applies, by reason thereof."
Given the availability of provisions for VDAs across ITR-2 (Capital Gains), ITR3 (PGBP), and ITR-5 (Income from Other Sources), taxation is determined by the assessee's intent at acquisition, sale, transfer, or disposal.
The Hon'ble Supreme Court in CIT v. Vegetable Products Ltd.4 held that where two reasonable interpretations of a taxing provision exist, the construction favoring the assessee must prevail. Reinforcing this, in Chief Commissioner of CGST v. M/s Safari Retreats Pvt. Ltd.5, the Court affirmed that, in cases of dual interpretations, the provision should be construed in favor of the taxpayer and against the revenue. Accordingly, gains from the sale of cryptocurrency (such as Bitcoin) prior to Assessment Year 2022-23 are chargeable as capital gains.
The status of an asset as a capital asset varies by context. For instance, agricultural land in urban areas qualifies as a capital asset, whereas rural agricultural land does not. Business assets like machinery, plant, or furniture held for investment or long-term use are capital assets; however, if maintained as stock-in-trade (e.g., by a dealer), they are excluded. The Supreme Court in Commissioner of Income-tax v. G.R. Karthikeyan6 observed that the inclusive definition of "income" under Section 2(24) of the Income Tax Act is designed to broaden its scope, not restrict it. The term "income" carries the widest amplitude and must receive its natural and grammatical meaning.
3 (2001) 3 SCC 430
4 (88 ITR 192)
5Civil Appeal No. 2948 of 2023, order dated October 3, 2024, at page 32, para 25(d)
6 (1993) 201 ITR 866
Consequently, any income derived from cryptocurrency falls squarely within the purview of the Act.
India's tax laws treat cryptocurrencies, now called Virtual Digital Assets, as versatile assets whose taxation depends on how you hold and sell them. They're not strictly capital assets under Section 2(14), yet transfers trigger taxes under Section 115BBH often as capital gains for investors, as ruled in the Raunaq Prakash Jain case, where courts favor the taxpayer in gray areas like Vegetable Products Ltd. For traders, profits count as business income, valued at fair market rates with allowable deductions; gifts over ₹50,000 fall under "Income from Other Sources" at slab rates. Drawing from Supreme Court wisdom in cases like Grace Collis (supra) and M.K. Bros. (supra), the key is intent: hold for growth, and gains stay capital; trade actively, and they're business profits. With ITR forms spanning all possibilities and 2026 amendments on the horizon, VDAs lock into the Income Tax Act's vast umbrella, taxing every yield without mercy, but granting the steady investor a clear edge over the hasty speculator.
Disclaimer: This article is intended solely for academic, educational, and informational purposes and does not constitute legal, tax, or financial advice. The views expressed are those of the authors and are based on the legal provisions, judicial precedents, and information available at the time of writing. Readers are advised to consult qualified legal or tax professionals before acting on any information contained herein. Neither the authors nor the publisher shall be liable for any loss or consequence arising from reliance on this article. Any legislative amendments, judicial developments, or regulatory changes occurring after publication may affect the accuracy or applicability of the contents discussed.
Authored by: - Sahil Bhalotia, Adv. - Hritik Pathak, Adv.
